Case 2: Toyota’s European Exposure It was January 2002, and Toyota Motor Europe

Question

Case 2: Toyota’s European Exposure

It was January 2002, and Toyota Motor Europe Manufacturing (TMEM) had a problem. More specifically, Mr. Toyoda Shuhei, the new President of TMEM, had a problem. He was on his way to Toyota Motor Company's (Japan) corporate offices outside Tokyo to explain the continuing losses of the European manufacturing and sales operations. The CEO of Toyota Motor Company, Mr. Hiroshi Okuda, was expecting a proposal from Mr. Shuhei to reduce and eventually eliminate the European losses. The situation was intense given that TMEM was the only major Toyota subsidiary suffering losses.

Toyota and Auto Manufacturing

Toyota Motor Company was the number one automobile manufacturer in Japan, the third largest manufacturer in the world by unit sales (5.5 million units or one auto every six seconds), but number eight in sales in Continental Europe. The global automobile manufacturing industry had been experiencing, like many industries, continued consolidation in recent years as margins were squeezed, economies of scale and scope pursued, and global sales slowed.

Toyota was no different. It had continued to rationalize its manufacturing along regional lines. Toyota had continued to increase the amount of local manufacturing in North America. In 2001, over 60% of Toyota's North American sales were locally manufactured. However, Toyota's European sales were nowhere close to this yet. Most of Toyota's automobile and truck manufacturing for Europe was still done in Japan. In 2001, only 24% of the autos sold in Europe were manufactured in Europe (including the United Kingdom).The remainder were imported from Japan (see Exhibit A).

Toyota Motor Europe sold 634,000 automobiles in 2000. This was the second largest foreign market for Toyota, second only to North America. TMEM expected significant growth in European sales and was planning to expand European manufacturing and sales to 800,000 units by 2005. However, for fiscal 2001, the unit reported operating losses of ¥9.897 billion ($82.5 million at ¥120/$). TMEM had three assembly plants in the United Kingdom, one plant in Turkey, and one plant in Portugal. In November 2000, Toyota Motor Europe announced publicly that it would not generate positive profits for the next two years due to the weakness of the euro.

Case questions

1.Why do you think Toyota had waited so long to move much of its manufacturing for European sales to Europe?

2. If the British pound were to join the European Monetary Union would the problem be resolved? How likely do you think this is?

3.What measures would you recommend Toyota Europe take to resolve the continuing operating losses in the short run?

4. What steps would you recommend Toyota Europe take to resolve the ongoing operating losses over the long term?

Explanation / Answer

ans 1)

The move to relocate manufacturing plants to Europe was Toyota's reaction to exchange rate volatility. As the Yen was rising against the euro, it was becoming dearer for Toyota to sell Japan-produced cars in their European market.For them to preserve their price competitiveness Toyota would have to absorb the exchange rate changes. In reaction to the strengthening yen, Toyota built a manufacturing plant in France. They planned for this new facility to be their primary plant for manufacturing Yaris cars in their European market.

Toyota might have waited so long to build this facility due to the current performances of some of the other facilities controlled by their European subsidiary. At this time they were reporting losses of over 9 billion yen. A few months earlier they even had to publicly announce that they would not be generating any profits for the next few years due to the weakness of the euro. This, however, did not stop Toyota from building a new plant in France. In fact, according to an interview with TMC President Fujio Cho, the decision to build the plant was "based on the encouraging sales performance of the Yaris in Europe." Toyota required a good reason to build another plant in a region in which they were currently suffering. The success of the Yaris could explain why the automaker waited so long

ans 2)

The British joining the EMU would eliminate the currency risk between the UK and Europe, but not

between Japan and Europe. The UK joining the EMU would erase the deviations in currency

value between the British pound and the euro only.

Though there has been continuing and heated debate over the possibility of Britain joining the

EMU, there is at present no certain plan to do so. In several ways the UK believes itself to be

somewhat the beneficiary of being the single large “European” country which is not euro-based

ans 3)

If Toyota was willing to continue incurring the operating losses in Europe, and put market share goals

above profit goals, then continuing the current operating and pricing policy would be in order. The

euro had regained some of its weakness against the yen in the recent year.

The fact that significant Toyota operations existed in the UK would be a continuing

dilemma as long as the UK stayed out of the EMU. The strength of the pound against the euro—and

the new-found stability in that rate seen in 2000 and 2001—did not bode well for UK-based

operations for European sales. In the longer-term, Toyota, like many other MNCs, would

have to consider moving more of its manufacturing and cost structure to within the EMU, not in

Japan and not in the UK

ans 4)

In the long-term, Toyota must inevitably move more of the automobile’s content

into manufacturing operations within the EMU

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